A Monthly Publication

 Once again the end of the tax year is looming, so it’s time to try to maximise tax-planning opportunities for the current year, as well as 2010/11. It is important to bear in mind that there are four key changes to income tax from 6^th April, which are:

· The standard personal allowance will be frozen at the 2009/10 rate.

· The threshold for higher rate tax will be frozen at £37,400

· The new 50% rate will apply to taxable income above £130,000

· People with income of more than £100,000 may find that they lose some or all of their standard allowance.      

 The overall effect of these changes will, of course, increase tax revenue considerably as more people fall into the higher bands.

 An obvious approach for owners or directors of limited companies will be to maximise salaries and dividends paid from the company before 6^th April in order to pay tax at 40% on income and 32.5% on dividends rather than the 50% on income and 42.5% on dividends over £150,000 which will apply in the new tax year.

 High earning self employed people could also delay the payment of tax at 50% by changing the end of their accounting year to March 31^st, but should seek advice from their accountants before doing so.

 In all cases the gambit of using a spouse to share income is a tried and trusted ploy to reduce tax liabilities which can produce very significant results in the right circumstances. The issue of tax planning as a couple is relevant in many areas, as each spouse will have valuable allowances to offset against taxation, which become particularly relevant where each spouse is taxed at a different rate, either during their working lives or in retirement. For example, it is highly inefficient for one spouse to receive pension income which is taxed at a higher rate while the other has none, so wasting his or her personal allowance (which increases with age). Transfers of assets between spouses do not attract capital gains tax so this can be a very attractive tool, but obviously requires professional advice, although pension funds are non transferable, so any planning for them needs to be done before retirement.

 ISAs are still the main method of investing free from income and capital gains tax. The new allowance for the next tax year is £10,200 in total, of which up to £5,100 can go into cash. However, for the over 50s the increased allowance is also available in this tax year, and should be utilised if at all possible.

 Enterprise Investment Schemes and Venture Capital Trusts also offer tax relief, but these are relatively high risk investments which need to be approached with care, and will only really appeal to those with high levels of income and assets and a relatively speculative attitude to risk.  

 For more cautious and/or smaller investors, it is worth noting that given the relatively high rates of income tax compared to capital gains tax (20% and 40% compared with a flat rate of 18%, there is a great deal of sense in investing for growth rather than income, which makes growth orientated bonds, OEICs and unit trusts an attractive option.

 Another important year end action is to ensure that capital gains tax allowances, which can’t be carried forward, have been utilised where appropriate (this year’s allowance is £10,100 per individual). This can be a very tax efficient way of realising profits from investments, and for larger sums it is possible to spread a disposal across two tax years, i.e. one part before 5^th April and the other just after, in order to use make use of two annual exemptions.

 The freezing of the nil rate band for inheritance tax at £325,000 in the Pre-Budget Report was bad news for many people, so it is important to ensure that, where appropriate, the annual £3000 exemption on gifts is fully utilised, as well as looking at the usual options of trusts and whole life policies. Trusts will also be a relevant tool for grandparents wish to make a tax efficient provision for grandchildren, as they can enable tax liability to be set against the child’s allowances, rather than the grandparents’. This is also a useful vehicle for parents to fund for their children’s’ higher education fees, although care has to be taken in terms of when encashment takes place.

There is little doubt that we will see more stringent taxation going forward as whichever party wins the General election will be desperate to increase tax revenue as a means of offsetting the huge National Debt, so it is becoming more and more important to utilise whatever legitimate tax breaks exist.